The Devaluing U.S. Dollar- A - Perspective

Introduction

What does it mean when you hear that the U.S. dollar is weakening? One normally associates the word "weakening" as something negative. Strong versus weak; good versus evil; that sort of thing. Indeed, there are many who believe that a weakening dollar is a bad thing; and there is something to that. Others think a weakening dollar is a good thing; and there is some validity in that also. So what is one to think? Do we need to batten down the hatches and head for shelter or do we need to be looking for ways to take advantage of new opportunities? Like most problems-education should be the first step in being able to make one's own judgment. We live in an era where we are all too busy to take the time to understand complex issues. We leave it to short, cryptic statements made by the mainstream media's talking heads. If an investor ends up on the wrong side of an issue (losing money) because they didn't take the time to do the due diligence themselves and took the advice of the "pros", the blame is squarely on the investor's shoulders. We are responsible for the choices we make; therefore, read this article and you be the judge if the sky is really falling in or the sun is shining through the clouds.

Section I: What's happening?

Anyone who is traveling or living overseas knows what's happening. A cup of coffee in Europe or Japan can cost up to $8.00 or more. And that's just "a cup o' Joe" and no Latte. When a tourist goes to trade dollars for Euros or Japanese Yen, they find that they can buy less of the local currency today than before. As a matter of fact, the U.S. dollar buys less than 30% fewer Euros today than it did just a few years ago; for an American tourist in Europe, the same amount of dollars now buys 34% less than 18 months ago. Sounds bad, doesn't it? However, if that same traveler went to South America or most of Asia, the dollar would buy just about the same amount of local currency as before. How does that happen?

Under today's system for establishing exchange rates between countries, there are two principle ways to categorize a nation's currency: Floating or Pegged. A floating currency is valued by the market place and determined by what prices buyers and sellers are willing to accept. Each floating currency changes independently of each other. A myriad of economic and political factors influence the price of an exchange rate and because these factors are not equal in effect for all countries, a currency might be valued more or less in comparison to another. Today, there are about 17 nations who allow their currencies to float against each other and let the market determine- on a second by second basis- what the value of what a currency should be.

Pegged currencies, on the other hand, are fixed to the movements of other floating currencies. For example, almost all of Latin American countries and many Asian countries have pegged their currencies to the value of the U.S. dollar. If the value of the U.S. dollar goes up or down relative to the Euro or other floating currencies, so do the currencies of those countries pegged to the U.S. dollar.

Over the past few years, the U.S. dollar has devalued against most floating currency countries. However, between 1995 and 2002, the dollar had appreciated almost 30% against the same currencies. What is actually happening is the U.S. dollar is coming back into sinc with its normal trend line. The U.S. dollar is merely adjusting from an overvalued status vis- a-vis other floating currency countries. As a matter of fact, the period of the overvalued U.S dollar helped to pull

Europe and other countries out of their economic doldrums that existed in 1999-2002. The strong dollar made their exports cheaper in U.S. markets.

To get a better idea of what is happening to the U.S. Dollar exchange rate, economists and investors use what is called the "Trade Weighted Index"

Figure 1

There were no headlines screaming the bad news about the increasing value of the U.S. dollar from 1995 to 2002. The downtrend from 2002 appears to be an adjustment back to a long term declining trend line. As you will see later, perhaps there should have been a little more of a fuss made when the U.S. dollar was being pushed higher. During the Clinton and Bush II administrations, the U.S. was promoting a "strong dollar" policy. It appears that the current change to the value of the dollar relative to floating currencies has rekindled the fears of a government out of fiscal and monetary control and a generally declining America.

Section II: What does it mean to have a strong or weak currency?

Having a strong dollar sounds good; and it is good if you are a U.S. citizen traveling abroad or a politician. Your dollars pulse with power in your wallet and you marvel at what an advantage it is to be a citizen of a country with a strong currency. Bargains abound in foreign countries and it always feels good to find a "bargain". Politicians like it because it sounds good: We have a strong economy and a strong dollar; therefore, we are strong and you aren't. Importers love a strong dollar because they can provide competitive products that domestic consumers prefer over domestically produced products or products not produced domestically at all. Consumers are happy because they can buy goods that can be less expensive or have higher quality. The government is happy because voters see the benefits of importing less expensive items which helps keep down inflation. But is this scenario a real picture of having a strong dollar? Let's examine the pros and cons of having a strong dollar.

Pros of having a strong U.S. dollar:

• Travel abroad is less expensive
• Consumers can purchase some products at lower cost and have a broader selection of items for consumption.
• Attract foreign investors in U.S. securities. This is important because the U.S. is dependent on foreign investors to help finance the budget deficits (more on this topic later).
• Less expensive to purchase foreign assets.
• Inexpensive imports help to keep down domestic inflation.

Cons of having a strong U.S. dollar:

• U.S. exports are less competitive in world markets.

For example, if an auto made in the US costs $20,000 in the U.S. and is exported to a country with a weaker currency than the U.S., it will cost the importer of that car more than $20,000 in local currency. Buyers might prefer a comparable auto produced domestically because it will be less expensive in local currency. This can affect profits and employment at the exporting U.S. Company. It can also mean less tax revenue for the U.S. government to help balance the budget deficits.

• Motivates transnationals whose mandate is to optimize profitability to locate in less expensive countries.
• Hurts the U.S. tourist industry as a trip to the U.S. becomes more expensive

Note: Since 2001, the U.S. has lost over 2 million manufacturing jobs. Did owners of U.S. based manufacturing decide that the strong U.S. dollar made exporting U.S goods less competitive with lower foreign production costs?

Pros of having a weak U.S. dollar:

• Make U.S. products more competitive in world markets.
• Provide more employment for U.S. export industries.
• Helps tourist industry as it becomes less expensive to visit the U.S.
• Increased tax revenues and reduced trade deficit to help balance budget and current accounts deficits. Ironically, the problems of the twin deficits are what cause the alarm about the falling dollar yet it can be a solution to the problem. (More on this topic later.)
• Boost domestic production and employment to replace expensive imported items from floating countries with higher exchange rates.

• Makes it less expensive for foreign investors to buy U.S. assets and securities. This is another paradox in that many feel that a falling U.S. dollar will scare investors away.

Cons of having a weak U.S. dollar

• Makes foreign travel more expensive.
• Increasing prices of essential imports (such as oil) impact inflation as producers raise prices to keep profit margins.
• Poor political image as it accentuates the lack of fiscal and monetary discipline and trade imbalances.
• May promote the need to raise interest rates to attract foreign investors to finance the twin deficits. This action might trigger a recession in the U.S.
• A U.S. recession could trigger a worldwide recession as U.S. markets are very important to most exporting countries.
• Could eventually lead to a collapse of the U.S. dollar and plunge world trade into chaos. ("The sky is falling" syndrome)

Section III: An In-Depth look at what's really happening.

There is a type of "patriot-investor" who believes that the U.S. government is at best incompetent and at worst corrupt and planning to trash the U.S. economy and make way for the famed "One-World government", which-by the way- would require a one-world currency. Of course there are always extreme positions that feed the fear mongers.

After reviewing the pros and cons of a strong and weak dollar, one could see that there are distinct advantages to having a weaker dollar than what previously existed since hitting a peak on 2002. Many free traders believe that within the context of globalization, a weaker dollar is essential to staying competitive. But many investors see the declining dollar as a cause for concern because of the growing U.S. budget and Trade deficits which are placed directly at the feet of an irresponsible U.S. government fiscal and monetary policy. To some, the trade imbalance is seen as one of the greatest scams ever perpetuated.

What a deal!

Let's say you are well thought of in your neighborhood and your neighbors trust you. When you buy some of their stuff at garage sales, you just hand them an IOU and take the goodies back to your home. You keep doing this for decades. You have a garage full of your neighbors' lawn mowers; TV's, game boys, old shotguns, sewing machines, clothes, silverware...and your neighbors have your old yellowed IOUs. Because you are well known and trusted to make good on your debts, your neighbors use your IOUs to pay for items purchased from other neighbors. You have thousands of dollars of goods for your worthless IOUs. Not only that, if you want more stuff, all you need to do is produce your little IOU form booklet. What a deal!!

This seemingly silly scene is what has actually been happening with the U.S. and its trade partners. You see, the U.S. is the only one with the booklet of IOUs. We give paper IOUs to our trading partners and they give us their cars, TV's, commodities, and all the entire imported inventory of Wal-Mart, Target...you name it. The U.S., in turn, sells its trading partner's food, military or commercial aircraft in return for its own IOUs. Over the last decade or so, the U.S. has imported much more goods than it has exported. Most of the time, U.S. trading partners just hold the IOU surpluses they've accumulated. It looks good for U.S. trading partners to have large reserves and a successful export trade and bad for the U.S. But what are the U.S. trading partners going to do with all those U.S dollars?

What is money, anyway?

The classic definition of money is something to the affect that it's a portable object which is perceived to have value and that value is transferable to others. The key thing to keep in mind is that all parties must recognize the value and transferability. Some might say that un-backed, "fiat" paper money or digital dollars are just part of the emperor's invisible wardrobe.

A Brief History of Money

For thousands of years, barter was the main way people traded. I'll trade you my three horses and two sheep for your daughter. You look at the three scrawny horses and dirty underfed sheep and say "no deal". Another man offers the same payment but the condition of his animals is much better. You accept. Even though the bartered goods were the same, there are no real consistent qualitative factors in the barter system. Not only that, it was cumbersome to herd the "money" from one place to the other. Also, the limited ability of making change probably shot down a good many deals.

Barter then evolved into trade facilitated by accepting a well known, consistent quality commodity or product such as grain or weapons to be used as a means of transferring wealth in exchanges. A millennia or so later, tangible items moved to symbolic when the first real minted money was created by the Lydian's in the 6^th century B.C. As a result of the ease that money contributed to the trading process, trade boomed wherever coinage was introduced and the concept of money as we know it now helped trans-form civilizations. As time moved on, counterfeiters moved in and there soon became a need for validating the value of symbolic money. In the 16^th century A.D., European goldsmiths began to issue paper notes as receipts based upon the amount of gold a customer had placed in custody with the goldsmith-banker. The gold backed notes issued by well known goldsmiths were recognized as trustworthy and accepted as payment by third parties. These notes could be converted to gold at any goldsmiths. Soon, goldsmiths quickly became bankers and the fees charged for the service drew many un-scrupulous entrepreneurs into the rapidly growing business activity.

The Bank of England was established in 1684 to help regulate the growing goldsmith-banking industry. Other nations followed suit. Most of them used some form of gold or silver backing for their currencies but others did not. More than several times, nations who issued un-backed currency created untenable inflation by unlimited printing of a nations currency in times of war or other economic crisis. However, as the Industrial Revolution ramped up in Europe, the State Regulated Banks became more important and banking became a much more influential.

The U.S. Federal Reserve System

The United States Congress established a central bank in 1914 following a devastating economic recession in 1907. The Bank act of 1914 (it took 7 years for congress to debate the issue) charged the Federal Reserve Bank (central bank) with the responsibilities of:

• Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates.

Supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers.

• Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.
• Providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system

What is the Federal Reserve System?

The Federal Reserve system is a cause of great controversy. The name Federal Reserve certainly conjures up a government institution but in reality it is owned and operated by private interests. Yes, that's right. The 12 member banks who own the shares of the Fed are in turn owned by private share holders in the member banks. The Federal part comes in when we recognize that the actions of the Fed are under the authority of the U.S. Congress and the Board of Governors and the Chairman of the Board are appointed by the President of the United States. Appointments of these powerful positions are supposedly apolitical because their terms are for fourteen years and can span many administrations and thus need to maintain the "long term perspective" of what's best for the country' economy.

The Fed controls the economy mainly through manipulation of the money supply, interest rates, and bank reserve requirements. Ideally, if the Fed wants to stimulate employment and the economy, it will lower interest rates. Conversely, if it wants to slow down the economy, it will raise interest rates. The primary variables which triggers the increasing or decreasing of interest rates is domestic employment and inflation. However, because the U.S. dollar is also the World's currency for international trade, what the Fed does domestically can also have an effect internationally. More specifically, there can be times when domestic interest rates may be increased or decreased to manipulate the value of the dollar exchange rate.

The U.S. Dollar-the World's Trading Currency

The U.S. economy was the only developed economy left standing after World War II, as a result, the U.S. dollar was made the international currency for trade. After the war, most of the nations pegged their currencies to a U.S. dollar dominated basket of currencies. At that time, the U.S. dollar was backed by gold. As post war economies climbed back from the abyss, international trade recovered and there was a need to expand the money supply for not only the expanding U.S. economy but also for growing world trade. So, in a way, the U.S. Fed needed to not only expand the U.S. domestic money supply but also for the rest of the trading world. As the dollar was backed by gold, it placed a constraint on manipulating the money supply and exchange rate of the dollar. In 1971, the U.S. uncoupled its currency from the gold standard and let the dollar float against other currencies. As no other nation's currency could expand to take on the dollar as the currency for international trade without inflating itself into big problems, the dollar has been maintained as a defacto necessity for trade. If nations wanted to trade, they needed to have dollars as a medium of exchange. But to many U.S citizens, the purposeful debasing of the U.S currency to provide a currency for the world has not been in the best interest of sound U.S. domestic policy. Citizens of the U.S. had no part in making the decision to let the fed become the banker to the world. But the tiger has long been out of the cage. More-over, the concerns may have been off the mark as the world has not only recovered from the devastation of World War II but also progressing rapidly-if not unevenly- for the past sixty years. After all, the U.S. is a major exporter and importer to the world and a healthy world economy is in the best interest of its citizens.

Fiat Money

Fiat money is money that has no convertibility. You can't go to a bank and exchange a dollar for a tangible asset (gold or silver) of certain value as you could have done before 1971. Fiat money exists because of the consensus of opinion that it has value and that others will accept and make transactions using the symbol of value. The issuer of the nation's currency is the sovereign governments who make and enforce the laws of the country. If citizens trust the government, they trust the currency. If they trust that the country will exist in the future and it has the ability to continue to exist, they will accept its currency. To most citizens of the world, their country's governments are substantial enough to accept and use its currency. Its a matter of confidence. When countries start showing signs of weakness or instability, the faith in its currency is directly affected.

As most citizens of the world aren't familiar enough with other countries to judge what is happening within another country, valid information is needed. To fulfill this requirement, nations make their "books" available for others to see. Political issues are also tracked. Like all creditors, nations are given credit ratings based on analysis. Today, the value of a nation' currency-if it is floating- is judged by a world wide free market composed of buyers and sellers of currencies.

The FOREX

The "FOREX" is the moniker given to the Foreign Exchange market. The Forex is a huge amorphous network of computers much like the OTC (over the counter market) where banks, governments, speculators and other interested parties can buy and sell the word's currencies. Trading takes place 24 hours each working day and Trillions of dollars are bought and sold each day. It is by far the world's largest financial market. Almost 80% of transactions involve the U.S. Dollar although the Euro-since its introduction in 1999- is gaining in popularity.

FOREX traders not only trade on technical analysis but also on fund-amental economic and political events in a country of interest. Of course, given the fact of the U.S. dollar dominance in international trade, there is a lot of scrutiny of what is happening economically and politically within the U.S. If the FOREX market sees stress in the U.S., the dollar may decline. Moreover, whatever the U.S. Fed does is watched with as much interest by international players as do domestic interests.

The U.S. Dollar Overhang-"a ticking time bomb?"

Under the Bretton-Woods system established in 1944, foreign central banks were allowed to exchange their dollars for gold at the rate of $35 per ounce. However, the growth of the U.S economy and an increasing U.S. balance of trade deficit (also known as "current accounts") created a "dollar over-hang" as foreign countries held ballooning U.S dollar assets as a result of balance of trade surpluses with the U.S. and the dollar overhang continued to worsen throughout the decade of the 1960s. By 1971 foreign holdings of US dollars stood at close to four times the US gold reserves. If the partners had made a run on the dollar, the U.S. would have been in default. The best alternative was for the U.S. to get off the gold standard of convertibility and let the dollar float. Most thought that the dollar would plunge in value, but it didn't. As a matter of fact, in the last 35 years, the U.S. money supply has more than tripled with little loss in real purchasing power. But that could be changing and that is why the alarms are being sounded today. But the real concerns are coming from a surprising place.

Who's really getting hurt with the devaluing U.S. dollar?

Trading countries are required to hold large amounts of U.S. dollar reserves and the huge U.S. trade deficit (about $800 billion in 2006) means that there are large budget surpluses for our trading partners. Consider the fact that the U.S dollar has fallen over 30% the past few years and you can under-stand why holders of U.S. dollars are concerned. First, the U.S gives them paper for products and then the currency (wealth) they hold devalues 30%. This doesn't make for happy trading partners. What concerns the U.S. domestic alarmists is that holders of U.S. dollars overseas will dump dollars back into the monetary system and cause an inflationary tsunami heading for U.S. shores. It's a possibility but first there would have to be some replace-ment for the U.S. dollar as the trade currency. There are many solutions such as a basket of currencies or an increasing use of the Euro. But before the tsunami takes form, foreign governments need to coordinate with all other trading nations-including the U.S. It's not in the world's best interest to tank the currency if one of the world's largest markets nor to further devalue the wealth that U.S. trading partners have built up through trade. Of all human qualities, "enlightened self-interest" can have a strong moderating influence.

Section IV: The Emperor is Drunk and Naked

What is underlying the fear for the U.S. dollar and the potential tsunami that might crush the U.S. dollar? They are:

1) The Federal Budget Deficit

2) The Current Accounts Deficit

The Federal Budget Deficit:

In 2006, the U.S has accumulated over $9 Trillion ($9,000,000,000,000) in debt and spent $413 billion (413,000,000,000) more than it took in. Indeed, the emperor of the free world has no clothes and seems as irresponsible as Brittany Spears.

It's simple. You can't spend more than you make, right? As individuals, it's considered bad form to spend like a drunken sailor. Maybe there are times when you act like a drunken sailor but you know that you must repay your debts for a momentary lapse in fiscal self-control. The fact is, the U.S govern-ment has acted like a drunken sailor for decades. Uncle Sam is by all definitions a deadbeat. An individual citizen would be condemned and forced into bankruptcy if they acted as fiscally irresponsible as the Federal Government has. But a world power and the banker of last resort is not like an individual.

Fig 2 Federal Budget Deficit as a per cent of GDP

Note: Fig 2 is for annual projections. Currently, the Total U.S. Federal Debt is over $9 Trillion-about 66% of the annual GDP. Sometimes, we need to put things of such size into perspective.

Consider this: If you- as an individual- went out and purchased a new home and it cost $ 300,000. and you financed it with a 30 year mortgage; your annual mortgage payment total would be about $24,000. Let's say your annual income is $ 454,545. Your total long term debt is the $300,000 mortgage (66% of your annual income which is a similar proportion to the long term debt of the content with this ratio. However, if you were spending $ 500,000 per year on just doing what you do, you would appear financially out of control. You need to do something. Either cut back on your spending or make more money. The same situation faces the U.S. Federal government- except for one very big difference. The U.S can print all the money it needs. But there are consequences to doing that; potential inflation. The point being, that owing 66% of one yearly income for long term debt is not that big of a problem. The earning capacity is certainly there. Not only that, in a worse case scenario, assets can be sold to pay-off a debt if need be. As we have seen just a few years ago, a modicum of fiscal responsibility and some good economic times can make annual budget deficit (about 6% of GDP) can disappear. But not the long term debt. But that too, can be taken care of if need be. The U.S. twin deficits are only a problem of political will.

Current account deficit

In 2006, the U.S. has imported almost $850 billion more than it exported.

Over the years, the U.S. has enjoyed the benefit of trading paper for goods and just printing what excesses it needed to cover. This is a function of free trade policies and a U.S. consumer preference for imported goods.

Fig 3.

Consumer demand has driven the desire to import more goods than is exported. But is the consumer to blame? Is it the lack of competitive exports from the U.S.? Is it the lack of government oversight to allow this imbalance to occur?

One of the great things about being a consumer in America is the broad selection of goods to choose from. One of the positive aspects of globalization is that many quality goods can be purchased for less money because of trade. Over the years, technology has spread to formerly low tech societies with low-tech wages and these "emerging markets" can now produce high tech goods at lower cost than many U.S. domestic products. While it may be true that the developed world has sown the seeds of its own demise by selling or licensing its technology, it has also benefited both exporting and importing nations. New industries in formerly less developed countries have helped to establish a better life for a vast amount of the world's population who have formerly been left out of sharing the fruits of the industrial revolution. Not only has the U.S. and other industrial nations provided (sold) its technology but they have also provided the markets for much of the new production. This fact can incite some xenophobic resentment, but that is short sighted and ill informed. More prosperous trading partners make for more trade. It can be win-win for all involved.

After World War II, the U.S. helped to rebuild the nations who had been intent on destroying it and within the same generation helped to create two of the most powerful nations-Germany and Japan. However, it wasn't all a matter of elevated consciousness, but it was a successful strategy for creating strong markets able to purchase U.S. exports. It was a win-win strategy and it's too bad American's aren't more aware of that enlightened strategy (The Marshall Plan) used on the vanquished by the victors. It was definitely an enlightened version of the bellicose expression, "to the victor go the spoils". But the model shouldn't need a disastrous war to bring about the same results. This is the hope for globalization. But for the time being, the visible horizon seems to signal pain for some U.S. workers and a decline in the power and standard of living for the citizens of the United States. No doubt, it is a possibility but that depends on the American people and their leaders. But things aren't always as they seem-particularly in today's confounding world. While there are some who call the current way of managing the U.S. government finances as negligent, there are others who see it as genius.

White Knights to the Rescue

Rather than bite the bullet and act fiscally responsible, the U.S. government (mainly through the Fed) has taken a more com-passionate and perhaps less risky strategy of borrowing back the fiat currency. Consider the fact that if the U.S government had acted "responsibly" and raised interest rates to keep a strong dollar, there most probably would have been a recession which would have had the effect of putting hundreds of thousands of U.S. workers out of work. They, in turn would no longer be producing tax revenue and the budget deficit might get even worse. It's a rock and a hard place sort of thing. This is where a deep understanding of the psychological nature of money comes in. Is it better to have real families out of work, or a temporary down tick in a consensus number? Not only that, a lower dollar-at this time- has many more positive aspects than pleasing the need for a "strong dollar". The U.S. is still seen as a good long term risk and foreign investors and governments understand the need to keep the psychology of fiat money workable.

What are the alternatives? Just look at the massive defaults on the foreign debt crisis of the ‘70s. Over the years since, the debtor nations have barely put a dent in their huge outstanding debt, but economies have continued to grow and formerly underdeveloped markets to become new trading partners. The "default crisis" has not been rectified but turned into a non event. Could this be a big benefit of fiat money: out of sight out of mind....out of existence? However, there must be a way to grow out of the budget and current accounts conundrum the U.S. now faces. Perhaps a policy that promotes growth along with restrained U.S. government spending is a sensible way to go. However, if the U.S. doesn't make some real attempt to address the issue, the White Knights might lose the faith. That would be very unfortunate for all.

Doomsday Scenario

If investors decide to dump their investments in U.S. bonds, it would greatly accelerate the supply of available dollars and drive the value down even further. If countries who hold large dollar reserves also decide to cut their losses, and short the dollar, that would greatly exacerbate the situation and the value of the dollar would come crashing down. This is the great fear that many investors and pseudo economists have.

So what!!

When the U.S. dollar devalues, U.S. exports become much more competitive. Soon, it would become too expensive for U.S. consumers to purchase foreign imported goods and domestic substitutes would take the place of expensive imports. The U.S economy would grow to meet the domestic demand and fill export demand for the comparative low prices for U.S. exports. Moreover, taxes would increase, which would help balance the federal deficit. U.S. exports would grow and current account deficits would quickly turn into surpluses. The dollar would strengthen and our trading partners would be screaming for the U.S to re-value the dollar (as they are already doing).

The U.S. is not going to roll over and die. "But we've dismantled our manufacturing capacity", you might say. In point of fact, over two million jobs were lost in the manufacturing sector over the last decade but capital flows much more freely across borders in these days of globalization and capital seeks profits. Profits in the U.S. would be a siren's call to capital as soon as the U.S. dollar gets low enough. Labor might be a problem and maybe this is why the U.S. government seems to be so sanguine about the illegal immigration problem. Today, even in a so-so economy, unemployment is low. If the U.S. does experience new export opportunities, where will the labor come from? But that's another story.

Section V: What to do?

Sometimes, we are our worst enemies. We need to be watchful but not fearful. Fear clouds judgment and perspective. Indeed, international finance and economics is a complex subject and that makes the public even more prone to panic. But like most successful investors, recognizing opportunities is more important to success than over-reacting to temporary problems. To the prudent investor, weakness is the time to buy, however, the due diligence needs to be done. In today's hectic world, most people don't have the time necessary to inform themselves sufficiently to make deliberate decisions. Because of this, we turn to others to help interpret what's going on. However, most gurus are "half-empty" observers because it's easier to hedge against being wrong than to see "half-full" and risk the chance of being wrong. Half-empty is a safe strategy. You win if it gets bad and nobody gets hurt. If you're wrong the risk is minimal because people usually don't see lost opportunity as damage; just bad timing caused by prudence.

Recommendations

I am a "half- full type" of guy. Its more fun.....and profitable. Most people call me a contrarian (and curmudgeon) until things turn and then I am just lucky. So here are some half-full recommendations for U.S. investors. As with all investments, each individual needs to understand their own risk profile.

1) Buy Shares of U.S. companies that export to Europe and other floating currency countries. As Josh Bivens has astutely pointed out, buy American companies that export transportation equipment, computer and electrical products, chemicals, and industrial machinery (except electrical). These industries provide 70% of U.S. exports to the European area and Canada.

2) Purchase shares in exchange traded(ETFs) Emerging Market funds. If all goes well, these markets-which comprise over 50% of the world's population-will continue to progress. These new markets also will provide new opportunities for U.S. exports as wealth in these countries increases. Depending on your age, a young investor should have at least 50% of an investment portfolio in high quality foreign companies; if you are older than 35 years old then this percentage should decline to about 20% and if older than 50 than 10-15%.

3) Invest in managed commodity funds. As the world's economies grow, there will be a growing demand for basic commodities to support the growth of infrastructures. However, trading in commodities is a very specialized skill and should be managed by professional management.

What about Inflation?

Investing is almost solely dedicated to protecting wealth against the ravages of inflation. The very fact that everybody knows about it and what it can do almost precludes it as a critical long term problem. (Spoken like a true contrarian, I must say). Just a few years ago, we were all concerned about deflation! I rest my case. Things change, but with the access to timely information and increased sources of information to choose from, inflation won't be the major concern if investors (and voters) stay informed. As a matter of fact, with timely information, even inflation can provide oppor-tunities.

Section VI: Final Word

What is to be feared is a lack of confidence in the future and in ourselves to make good decisions. If one listens to the gloom and doomers, emotions of despair and fear may drive the herd in the wrong direction. Things aren't that bad, as a matter of fact many economists have been calling for a lower dollar for the reasons discussed. What needs to happen during the continuing process of globalization is to expanded economic vision beyond our borders. Don't be fearful of what can be lost but rather focused on what can be gained. The current debt "crisis" will disappear rapidly (as it did during the late ‘90s) and become a non-issue to be replaced by other unforeseen problems. As the ancient Chinese blessing states: "May you live in interesting times." Keep informed, trust yourself to make good decisions and be a "half-full" investor.

© 2008 Phoenix Financial Publishing Inc.

Contact Information

E-Mail: tim@confidentrader.com